Q: I did some work in December and sent out an invoice that got paid in January. Do I have to declare the income in the year when I billed, or in the year when I got paid?

A: There are two ways of declaring income: accrual and cash. With Accrual, the income is declared as soon as it’s earned/worked for. So in this case, the income would be considered to have been earned in December.

However, many businesses operate on the Cash basis, by which the income is declared as soon as it’s collected from the client, i.e. when the money moves. In that case, you’d declare the income to have been earned in January.

In a technical sense, Accrual is considered more ‘correct’ by accounting standards. However it’s not really the way individuals tend to think, and for smaller businesses like being a freelancer or self-employed, it can make more intuitive sense to use the Cash method. Moreover, CRA is fine with you using whichever method you’re comfortable with, and in most cases it won’t make a significant difference to your tax picture in the long run.

The only caveat being, once you choose a method you need to stick with it. If that weren’t the case, a person could choose to use the Accrual method in one year, and Cash the next, meaning that the income on the invoice described above would be declared twice. (Or go the other way, from Cash to Accrual, in which case the income would never be declared.)

Switching methods makes it highly likely that you’ll under- or over-declare your income. Staying consistent — whichever method you choose — ensures you’ll declare all your income at some point, but only once.